Wednesday, November 14, 2007

Beeronomics: Widmer and Red Hook Merger

Its all happening too fast! I had planned, after the close of voting for your favorite Oregon brewery (one day left!!), to write about craft brewers and strategy. I was going to talk about more mainstream strategies like Widmer and less mainstream like Rogue. I was going to talk about product variety strategies, like Full Sail bringing Session to market and Ninkasi's Schwag. And I still will. But the merger between Widmer and Red Hook, as reported in today's Oregonian has forced my hand early, so be prepared for a few days of Beeronomics. (Drat, that monumental post on stabilizing Oregon's revenue collection will have to wait another week it seems)

So what does the Widmer/Red Hook merger signify? One thing is that it may perhaps signify a trend in craft brewing toward larger scale to capture efficiencies. I am fortunate to have Vic and Carol Tremblay as colleagues, for they are experts on the economics of the beer industry. One of the things they have studied is what is known as "Minimum Efficient Scale" (MES) in the beer industry. This is how economists refer to the exhaustion of economies of scale - you know, how things become cheaper per unit as you produce more. It turns out that MES in beermaking has rapidly increased in the past 50 years. In 1960, they estimate, MES was 1 million barrels but had reached 23 million barrels by 2001. (And, by the way, we generally do not think that you can get too big as you can always divide operations between different plants so 23 million barrels is a target to meet or surpass). Why?, well increased mechanization, better transportation and bigger capacity for a start. To give one specific example, in 1987 a high speed canning line in a large brewery could fill 2,000 cans per minute! So to operate just one of these lines efficiently, you would need to produce at least 2.18 million barrels of beer. Methinks Caldera is just a wee bit under that target. This has nothing to do with quality, variety, honor...whatever. These are the cold, hard facts: economies of scale exist in beer brewing, they can be quite large and thus the economic incentive is to grow bigger and become more profitable and/or more competitive.

So where does Widmer/Red Hook fit in all of this? According to the always excellent John Foyston of the Oregonian, the combined brewery will produce 650,000 barrels a year. Far form MES, but probably a significant enough improvement in scale efficiency to make this venture worthwhile. This is about what Sierra Nevada produces, but is still quite far behind Boston Brewing - the craft beer king. It is perhaps no coincidence that Widmer, perhaps the most commercially minded brewery (consumer-driven?), is at the forefront of consolidation. (Both Widmer and Red Hook also have Anheuser-Busch as a minority owner)

This is a troubling trend for the craft brewing industry in Oregon, in my opinion, because there are competing economic forces at work. Consumers love variety, but producers love scale. The question will be, do consumers love variety enough to shell out $9 for a six pack of Dead Guy versus $5 for a six of Broken Halo? (Psst...go for the Dead Guy) I fear the answer to that question, for it is one thing to have brew-pubs where you can find quality, interesting craft beer, but it is another thing to find it in supermarkets (especially when you have two young kids and pubs are not so easy to frequent). This and the shortage and expense of hops and barley make me fearful of what may happen to Oregon's wonderful craft breweries over the next few years. There may be more pressure on economizing on ingredients and reducing the variety of offerings in the years to come.

NB: Jack Joyce of Rogue will be hosting the OSU Economics Club at the Brewery in Newport where we'll get to ask him about all of this stuff. OSU students: contact me if you are interested in joining.